The Federal Reserve, America's central bank, last night chopped another half a point off interest rates, adding to last week's shock three-quarter point cut in an attempt to head of a housing market slump and economic recession. The move takes US rates down to just 3% and means the Fed has cut rates by 2.25% in the past four months, taking them to their lowest level since 2005. It also marks the most aggressive rate cutting spree undertaken by the Washington-based Fed since the early 1980s.

The widely expected announcement came after much worse than expected data showing that the world's largest economy struggled badly in the last three months of 2007, growing only 0.6% on an annualised basis, way down from the third quarter's robust 4.9%.

In the statement, the Fed said that "downside risks" remained to the economy, but its cumulative rate cuts should help alleviate those risks. It also said that the credit crunch meant financial markets remained under stress and that in turn was restricting the flow of credit to households and businesses. And it said it was still worried about the housing market, where the sub-prime crisis is playing out and where prices are still falling.

"Recent information indicates a deeping of the housing contraction as well as some softening in labour markets," the Fed's rate-setting committee said.

"The committee will continue to asses the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks," the statement said. US stocks jumped on the news, with the Dow Jones up 57 points, or 0.45%, immediately afterwards while the dollar fell sharply against the euro to around $1.484.

The Fed drew criticism after last week's emergency rate cut after French bank Société Générale revealed two days later it had lost more than $7bn (£3.5bn) unwinding unauthorised trades by employee Jérôme Kerviel. Markets wondered whether the sales had been the main reason for falls in global equity prices on the Monday which misled the Fed into slashing rates. But a Fed official has since said that market losses were only one factor.

The growth data showed that the deepest slump in the real estate market for a quarter of a century acted as a brake on expansion. The 0.6% figure meant that the US economy grew by 2.2% in 2007 as a whole - the weakest expansion seen since the 1.6% growth recorded in 2002, when the economy was affected by the dotcom collapse and the aftermath of the September 2001 terrorist attacks. The figures put the dampeners on financial markets with world stocks, commodities and the dollar all receded ahead of the Fed decision. The FTSE 100 ended down 48 points, or 0.8% lower at 5,837.3.

Gold prices, which earlier in the day hit a record high of $933.10 an ounce, fell back to around $921 on the news, as dealers bet the Fed would make another big rate cut, in turn reducing the cost of holding gold relative to other US assets.

Spending on new home building dropped at an annual rate of 23.9% in the fourth quarter, the biggest quarterly drop in 26 years, after falling 20.5% in the third quarter. Over the course of the full year, residential spending fell 16.9%, the worst annual performance since the deep decline of 1982, when double-digit interest rates were used to bring down inflation.

The figures suggested the US may be suffering from a mild dose of stagflation - weakening activity plus higher inflation.

A gauge of prices favoured by the Fed - personal consumption spending excluding food and energy items - gained at a 2.7% annual rate in the fourth quarter. That was well ahead of the third quarter's 2% increase and Wall Street expectations. It was the biggest increase for any three months in one-and-a-half years.

Alan Greenspan, the former chairman of the Fed, said that the chances of a US recession were greater than 50-50. The technical definition of a recession is two consecutive quarters of contraction. Many analysts think the US is already in a recession.